Business Context and Reporting Period
Loews Corporation is a diversified holding company with subsidiaries operating in commercial property and casualty insurance (CNA Financial), tobacco production (Lorillard), natural gas transmission (Boardwalk Pipeline), offshore drilling (Diamond Offshore), hotels (Loews Hotels), and watch distribution (Bulova). This Form 10-Q covers the quarterly period ended June 30, 2007, and the six months ended June 30, 2007.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $4,637.3 | $9,297.0 |
| Net Income (Consolidated) | $653.4 | $1,421.7 |
| Net Income Attributable to Loews Common Stock | $511.7 | $1,162.4 |
| Net Income Attributable to Carolina Group Stock | $141.7 | $259.3 |
| Diluted EPS (Loews Common) | $0.95 | $2.15 |
| Diluted EPS (Carolina Group) | $1.30 | $2.39 |
| Net Cash Provided by Operating Activities | $1,230.4 (Six Months) | $2,324.8 (Six Months) |
| Total Assets | $79,537.5 (June 30, 2007) | $76,880.9 (Dec 31, 2006) |
| Total Liabilities | $58,864.1 (June 30, 2007) | $57,482.8 (Dec 31, 2006) |
| Long-term Debt | $4,957.4 | $5,567.8 |
Material Changes Versus Prior Period
- Revenue Growth: Consolidated revenues increased 8.4% for the quarter and 9.1% for the six-month period compared to the prior year, driven by higher investment income, increased manufacturing revenues at Lorillard, and strong performance at Diamond Offshore.
- Profitability: Net income attributable to Loews common stock increased 7.7% for the quarter and 22.6% for the six-month period. This was primarily due to improved results at Diamond Offshore and increased investment income, partially offset by net investment losses.
- Investment Losses: Net investment losses for the six months ended June 30, 2007, were $3.6 million (after tax and minority interest), a significant improvement from $58.8 million in the prior year period. This improvement was driven by a $91.6 million after-tax gain from the conversion of Diamond Offshore debentures into common stock, which offset increased other-than-temporary impairment (OTTI) losses in the fixed maturity portfolio.
- Segment Performance:
- CNA Financial: Standard Lines and Specialty Lines reported improved combined ratios. Net prior year development was favorable for Standard Lines ($33.0 million) but unfavorable for Other Insurance ($9.0 million).
- Lorillard: Net income increased 18.3% for the six months, driven by higher effective unit prices and lower promotion expenses, partially offset by increased State Settlement Agreement costs.
- Diamond Offshore: Net income increased 39.7% for the six months due to higher dayrates and utilization rates.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Event (HighMount Acquisition): On July 31, 2007, the Company acquired HighMount Exploration & Production assets for $4.025 billion. The acquisition was funded with $2.4 billion in cash and $1.6 billion in term loans. This introduces risks related to reserve estimates, commodity price volatility, and integration.
- Investment Portfolio Risks: The Company recorded OTTI losses of $263.0 million for the six months ended June 30, 2007, primarily in corporate bonds, asset-backed bonds, and U.S. Government bonds. While the Company maintains that remaining unrealized losses are temporary, it notes exposure to sub-prime mortgage collateral (less than 2.0% of total invested assets).
- Legal and Litigation:
- Tobacco: Lorillard faces substantial litigation, including product liability, class actions (e.g., "lights" cases), and reimbursement suits. The Company is subject to the Master Settlement Agreement (MSA), requiring annual payments of $9.4 billion (industry-wide) adjusted for inflation and volume.
- Insurance: CNA faces significant uncertainty regarding Asbestos, Environmental Pollution, and Mass Tort (APMT) reserves. The Company recorded $3.0 million of unfavorable asbestos reserve development for the six months ended June 30, 2007.
- Boardwalk Pipeline Impairment: Boardwalk Pipeline recognized a $14.7 million impairment charge in the second quarter related to the abandonment of a salt dome storage cavern near Napoleonville, Louisiana, due to uncorrectable anomalies.
- Accounting Changes: The Company adopted FSP FTB 85-4-1 regarding life settlement contracts, resulting in a $33.7 million increase to retained earnings. FIN No. 48 adoption resulted in a $36.6 million decrease to retained earnings.
Important Facts for Investor Verification
- HighMount Acquisition Impact: Verify the integration progress and the accuracy of the $2.5 trillion cubic feet equivalent reserve estimates for the newly acquired HighMount assets.
- Investment Portfolio Quality: Monitor the severity and duration of unrealized losses in the fixed maturity portfolio, particularly asset-backed securities, and the potential for future OTTI charges.
- APMT Reserve Adequacy: Assess the sufficiency of CNA's $1.366 billion net asbestos reserves and $393 million net environmental pollution/mass tort reserves given the high degree of uncertainty in litigation outcomes.
- Tobacco Settlement Obligations: Track Lorillard's cash flow requirements under the Master Settlement Agreement, including the $746.9 million paid in the first half of 2007 and the dispute regarding market share adjustments.
- Diamond Offshore Debt Conversion: Confirm the long-term impact of the debenture conversion on the Company's ownership percentage (reduced to 51%) and the sustainability of high dayrates in the offshore drilling market.